'The price is right'. This is one of the mots compelling arguments for why the dollar is set for a prolonged period of strength, argues Barclays Capital.
"Importantly, the turn in the US dollar comes after a prolonged period of weakness. Indeed, Even though the pace of dollar strengthening since mid-summer has been relatively extreme, the level remains quite low compared with its long-run history," Barclays notes.
'How un-extreme?
"Figure 4 looks at the real trade-weighted dollar over the past 50 years. While the dollar rise in the past few months is detectible (just), it is tiny relative to previous dollar trends. And even with the rise since 2011, the real US dollar index remains well below its longer-run average. This does not by itself argue for a higher dollar, but it should put into perspective how “un-extreme” the latest dollar rally has been," Barclays clarifies.
Once the US dollar does begin to trend, the trends are typically large and persistent.
"The last major large dollar trend began in 2002 – it lasted for 6-8 years (depending on whether you include the brief crisis-driven dollar jump), and during that time, the dollar fell by more than 25%. If, for the sake of consistency, we assume the dollar uptrend began in 2011, the real-trade-weighted dollar has risen only 10% and is just past the three-year anniversary for the start of the trend," Barclays adds.
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